Monday, August 9, 2010

What's Happening With Barcelona's Finances?

Just a few weeks ago, everything looked wonderful at Barcelona. They had won La Liga for the second season in a row, once again finishing ahead of Real Madrid. Despite their bitter rivals breaking the world transfer record twice last summer when buying Kaka and Cristiano Ronaldo, they could not match the talents of Xavi, Iniesta and Lionel Messi, who was voted FIFA World Player of the Year.

Although they could not repeat the previous season’s Champions League triumph, being unable to find a way past the defensive wall built by Jose Mourinho’s Inter in the semi finals, Barcelona did subsequently provide most of the players for the Spanish team that won the World Cup in South Africa.

However, July was not so kind to the Catalan club – at least from the financial perspective. Early in the month came the surprising news that the club had been forced to seek a sizeable bank loan of €150 million in order to overcome short-term problems with their cash flow. Incoming president Sandro Rosell was quick to explain that the credit request had initially been made by the previous Barcelona board under Joan Laporta’s presidency, “knowing that there were insufficient resources.”

Rosell blamed the former regime for this sad state of affairs, “We have taken over a club in debt and with liquidity problems, but we are resolving them.” Worse still, he claimed that the money was needed “to pay the important commitments such as the salaries of the players, coaching staff and employees.” Failing to pay the players is serious stuff, which was highlighted when the club sold defender Dmytro Chygrynskiy back to Shakhtar Donetsk for €15 million, which was €10 million less than they had paid for him only a year earlier, with Rosell confirming that the sale was motivated by financial requirements as well as sporting considerations.

As if that were not bad enough, the club then shocked the sporting community when they announced a major restatement to the accounts previously published at the AGM for the year up to 30 June 2010. The new vice-president for economic affairs, Javier Faus, said that an audit had revealed a series of adjustments that turned the €9 million profit declared by the former treasurer, Xavier Sala I Martin, into a massive loss of €80 million – that’s a huge difference of €89 million. The auditors’ proposed changes reduced revenue from €446 million to a still impressive €409 million, while increasing costs from €429 million to an unprecedented €478 million.

How can this be? What on earth is happening with Barcelona’s finances? This is mes que un loss by anyone’s standards.

The first point to make is that even in an age where we have International Financial Reporting Standards (IFRS), accounting is not quite as black-and-white as people might imagine. There is a considerable degree of judgment applied over which revenue and costs should be recognised in the accounts. Even Faus admitted that the old accounts were not “fixed”, but the new board had simply taken a far more conservative approach, “We opted for caution.”

"Laporta and Rosell - best of friends?"

One of the fundamental accounting conventions is prudence and it does look like Laporta had a tendency to count his chickens before they hatched. On the other hand, you can be too careful. As an analogy, if you believe that it’s going to rain, you might take an umbrella with you when you go out, but you probably wouldn’t refuse to leave the house just in case you get wet.

In fairness to the previous board, their results were unaudited. In fact, it’s a great achievement for the club to release draft accounts just a few days after the books closed. Most companies do not do this, as there are invariably numerous discussions with the auditors before the final figures are agreed. By the way, Deloittes are not new to the club, but have been auditing the accounts for many years, so there’s nothing too sensational about their role in the restatement.

There are three categories of adjustment to the accounts, which relate to television (€56 million), player transfers (€12 million) and land (€21 million). The largest is a €38 million provision for a legal dispute with TV company Sogecable, which the new board has decided to fully cover, even though they believe that they have a strong legal case. This is a long-running dispute, but, interestingly, Deloittes did not require a full provision in last year’s accounts.

Still on television, two adjustments were made for payments from current TV rights holder Mediapro, totaling €18.5 million. The first one is for a €16 million bonus payment that Laporta booked, even though it comprises four annual payments of €4 million until 2013. The auditors decided to only include this year’s money, leading to a €12 million adjustment. This could be argued either way, but given the long-term nature of the payments and Mediapro’s well-publicised difficulties, this correction is probably fair enough. Barcelona also have a legal dispute (another one) with Mediapro worth €13 million, which the auditors have only included at 50%, as it is not certain that the case will be won, leading to a €6.5 million adjustment.

Similarly, there are two adjustments for player transfers. In the case of Thierry Henry, even though his free transfer to the New York Red Bulls was only finalised in July, Faus claimed that the contract was signed before the end of last season, meaning that the remaining €8 million amortisation should be booked in the 2009/10 accounts. In yet another legal dispute (how much do Barcelona spend on lawyers?), the club is owed €4 million from Espanyol for the transfer of midfielder Raul Baena, which the auditors have not included, again because payment is far from guaranteed.

"Happy days"

Like animals boarding Noah’s Ark, the land adjustments also came in “two by two”. Very little of the proceeds from the sale of the Sant Joan Despi land has been received to date, despite the contract being completed, so the auditors have reduced this income by €15 million. Unless they seriously believe that the money will not be paid, this looks a bit too cautious to me. Usually, you do not wait until the money is received before recognising the income. In addition, two valuations were provided for the land at Viladecans: Laporta’s expert suggested €17 million, while Rosell’s appraiser estimated €5.7 million. Using the wisdom of Solomon, the auditors split the difference, producing a €5.7 million adjustment.

Without examining all the details behind these adjustments, it is impossible to say whether they are justified or not. My gut instinct is that they are overly prudent. What we can say with confidence is that none of these adjustments impact the club’s cash flow, as they are simply accounting entries for provisions and revaluations.

Given the striking drop in profitability, you have to ask whether Barcelona set a completely unrealistic budget for 2009/10.

On the face of it, looking at the projected growth from the 2008/09 results, you would have to say no. Revenue was only budgeted to increase by €20 million from €385 million to €405 million and almost all of that growth was due to €40 million profit on sales of assets (players €25 million, land €15 million). Yes, that’s the same land sale that the auditors adjusted this year. All other revenue streams were largely unchanged with marketing revenue actually forecast to decline, as they did not anticipate a repeat of the previous season’s spectacular trophy wins.

They also forecast €13 million cost growth from €362 million to €375 million, but this looks less reasonable. Player amortisation was budgeted to increase by almost 30% (€16 million), reflecting the impact of new players, but salaries were hardly increased at all. This never made sense to me and, as we shall see, this proved to be hopelessly optimistic. There was also an attempt at cost containment with other expenses cut by €6 million. All in all, former economic vice-president Joan Boix described this as “a very balanced and austere budget.”

So how did the actual 2009/10 results compare to this budget?

Using the figures after the audit adjustments, we can see that the revenue was pretty much in line. In fact, it was actually €4 million better than budget, as the negative variance due to the non-booked profit from the land sale was more than compensated by the core revenue. Marketing revenue was €7m above budget, thanks to more royalties from Nike and higher merchandise sales, while television revenue, the source of so much concern, ended up €16 million better than budget (11% higher than last year), mainly due to more money from the Champions League, following the 30% increase in the total pool. Although match day income was slightly lower than budget, it rose by 3%, helped by a 7% increase in the number of members.

However, the stand-out variances against budget were in the costs, which were an awful €103 million worse, coming in at a grand total of nearly half a billion Euros. The audit provisions are the reason for the €66 million adverse variance in other expenses, but the real damage is done in salaries. Adding together all staff (sports and administration) produces a jaw-dropping figure of €263 million, which is €36 million worse than budget. Put another way, the budget was out by 16%, which is a hell of a lot in just 12 months. It’s not as if they’re trying to forecast the lottery numbers, for heaven’s sake.

"Is the club down for the count?"

In fact, after all the audit adjustments, the total shortfall against budget is a round €100 million. Ouch. The solid revenue growth of 6% has been obliterated by terrifying cost growth of 32%. Granted, a considerable chunk of this is the result of once-off provisions, but much of it is down to player expenses – amortisation and salaries.

The wages were already very high, but €263 million is a scary figure. To place that in context, big-spending Real Madrid “only” paid out €187 million in staff costs last year (though it may have increased since then). The club identifies three reasons for the increase: new signings, contract improvements and variable compensation. The bonus payments were worth around €40 million, so Barcelona are, to some extent, victims of their own success.

As you would expect, the wages to turnover ratio has been on a rising trend and now stands at 68% (using Deloitte’s definition of revenue). This is by no means terrible, being within UEFA’s suggested maximum of 70%, but must be a concern. As a comparison, it’s about the same as Chelsea, though it is much worse than Manchester United (44%) and Arsenal (46%). It’s also lower than 13 clubs in the Premier League, though these clubs do not have anything like a €400 million turnover. Whatever. But what is indisputable is that the increase in salaries is the logical result of their (how shall we put it?) “generous” transfer policy.

As indeed is the increase in player amortisation to €71 million, which is even higher than Real Madrid (€64 million) and a lot more than even the most profligate English club (Chelsea €59 million), though Manchester City (€47 million) might get close after their third summer spending spree in a row. Of course, Barcelona have been no slouches in that department, splashing out around €90m last summer on bringing new players to the Camp Nou, including the unpredictable forward Zlatan Ibrahimovic, that man Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the promising striker Keirrison. This year, they picked up Valencia’s prolific striker David Villa for €40 million, but the amortisation on his transfer fee will only be reflected in next year’s accounts.

Enough about the P&L, what about the balance sheet?

The major concern is obviously the debt, which Javier Faus said was “the biggest in the club’s history.” We’ve not been given the full details yet, but the adjusted figure released by the club was gross debt of €552 million (net debt €442 million). However, we do know that this represents total liabilities and is thus misleadingly high, as it includes trade creditors, accruals and even provisions. In fact, Rosell and his cohorts should be ashamed of this needless scaremongering, which is not consistent with standard accounting practice – or, indeed, UEFA’s definition, which explicitly states, “net debt does not include trade or other payables.”

As an example of how absurd the total liabilities definition is, just look at how high other clubs’ gross debt would be using this measure: Real Madrid €683 million, Liverpool €578 million and Manchester United €1.1 billion. Even Arsenal, which is regarded as the template for financial sustainability, would have “debt” of €767 million (though it’s come down a lot since the last annual accounts). This places Barcelona’s €552 million firmly into context. To use an old adage, you have to compare apples with apples.

Under UK accounting practice, net debt includes bank overdrafts and loans, owner and/or related party loans and finance leases less cash and cash equivalents. Under this definition, Barcelona’s net debt in last year’s accounts was actually only €20 million, compared to Rosell’s total liabilities of €489 million.

The truth is that Barcelona’s real debt lies somewhere between the narrow UK accounting definition and the new board’s widest possible measure.

"Keep your eye on the ball"

In fact, UEFA’s definition of net debt also includes the net balance owed on player transfers, which is probably the most reasonable approach to take, as this is an important part of Barcelona’s business model. Again, we have no way of knowing how much Barcelona owe to clubs for other players, though last year’s books included just under €90 million. This is why Laporta could truthfully claim last year that “the ultimate proof that Barca has a solid economic base is that we didn’t have to make any new debts when signing new players this summer”, as he was only referring to bank loans. However, this is not the whole story if money is still owed to other clubs on those transfers.

Whichever way you look at this, what is very clear is that net debt has increased by well over €100 million in a year, which is obviously not something to be proud of. The previous board gave two reasons for this significant increase: €65 million for outstanding taxes and €60 million for the transfers of Ibrahimovic, Villa and Chygrynskiy.

Since the accounts were closed, Barcelona have secured an additional €155 million loan from a group of banks led by La Caixa and Banco Santander, but this is unlikely to have greatly increased their total debt, as my guess is that this was largely used to pay off existing liabilities like the tax bill and some transfer payables. It would make sense for them to pay off short-term liabilities with longer-term debt. Often, when clubs have problems with debt, it’s not so much the magnitude that’s the issue, but the timing of the repayments. That’s why Arsenal’s long-term debt is not a concern, but Liverpool’s short-term debt is.

Even with this new credit, Barcelona’s bank loans are relatively low. Laporta’s AGM presentation gave a figure of €114 million, though for some reason this included a €57 million tax credit, so presumably the real bank loan was (coincidentally) €57 million. If the additional €155 million were to be added to that, the total bank loans would be €212 million. This is all speculative in the absence of a detailed balance sheet, but the point is that such a bank loan is eminently serviceable with annual revenue of over €400 million.

This has effectively been confirmed by Rosell, “The club is not bankrupt, because it generates income. The banks know that we have a business plan that will allow them to recover the money.” That confidence is supported by the club’s recent record, as it made profits six years in a row before this year’s loss. Faus confirmed that this is “not a dramatic issue”, as Barcelona has hidden assets worth over €250 million that are not reflected in the balance sheet, such as youth players and real estate. He also pointed out that the club has on its books the best player in the world plus eight players who have been world cup winners, so it’s not all doom and gloom.

The reality is that Barcelona can always tap into credit from Spanish banks. You simply cannot imagine a scenario where a local financial institution would be responsible for making the emblem of Catalonia bankrupt, given that its customer base is largely made up of the club’s supporters. Indeed, this loan has been given at a very low rate of interest (Euribor plus 2.5%, by all accounts), which indicates the positive credit rating that the club still enjoys with the banks, though this may well be a “friendly”, somewhat political rate.

On the other hand, there has to be some concern that the club is experiencing any financial problems at all after two years of fantastic success on the pitch, especially as so many of the first-team has emerged from their own academy (the famous La Masia). It makes you wonder what would happen to their numbers if the team suddenly stopped performing. Then, there are the generic economic difficulties in Spain, as the country faces one of the worst recessions in Europe with spiraling unemployment and a genuine credit crunch.

"Shout, shout, let it all out"

This is epitomised by the problems affecting Mediapro, who have a seven-year deal, due to expire in 2013, worth over €1 billion for Barcelona’s TV rights. These are so severe that the company has sought bankruptcy protection over a dispute with Sogecable, who, you might remember, are also in litigation with Barcelona. Last year, Laporta described the agreement with Mediapro as “the best contract on the market” regarding TV rights, but Rosell might well disagree. Although the new president said that Barcelona had been given assurances that the money would be paid, this was only a “verbal guarantee of payment”, unlike the bank guarantee supporting Real Madrid’s contract with Mediapro. If that’s true, that’s astonishingly inept.

However, in the event that Mediapro went under, “the cancelling of the contract would be immediate” and it is difficult to believe that another television channel would not want Barcelona’s broadcasting rights. They might pay less, but it is extremely unlikely that the club’s TV revenue would disappear altogether.

Of course, there’s a broader danger here, as the other clubs in La Liga attempt to implement collective bargaining with the potential negative implications for the business models of the “big two”. Clearly, both Barcelona and Real Madrid will resist this with all their might, as it would obviously mean a hefty reduction in their revenue, but such a change might not be catastrophic.

"How do you spell DNA?"

First, even with the Premier League’s collective model, the big clubs still enjoy by far the highest share of the total pool, as the distribution model is geared towards those finishing higher and the number of times a team is shown live on television (inevitably the top clubs). Second, if the Spanish league becomes more competitive, then it may become a more marketable product globally, which would increase the fees paid for overseas rights. Indeed, Real Madrid president, Florentino Perez, has already been pushing for an earlier kick-off for some La Liga games, so that they are more convenient for Asian TV audiences, “The change is vital if the Spanish league is to compete with the English.”

But are Barcelona too dependent on TV revenue? Well, it’s definitely very important, but it actually accounts for only 39% of their total income. As a comparison, only three clubs in the Premier League have a better (lower) proportion than that: Arsenal 34%, Manchester United 36% and Chelsea 38%. In fact, Barcelona enjoy a very balanced mix of revenue: television €151 million, commercial €121 million and match day €116 million. So, even if they were to lose 100% of their TV income (hardly a realistic assumption), they would still receive €237 million, which is not much less than clubs like Chelsea (€248 million) and Arsenal (€270 million).

The club’s revenue growth has been mightily impressive, up from €123 million in 2003 to €387 million in 2010. So their revenue has more than tripled in seven years with Xavier Sala i Martin describing this year’s revenue as “the largest income of any club in the world including the United States.” However, as the old saying goes, “turnover is vanity, profit is sanity.”

"Say hello, wave goodbye"

That’s absolutely correct, but another expression is even more important, namely “cash is king”. The reason why companies fail is cash flow problems. It does not matter how large your revenue (or profits are), if you do not have the cash to pay suppliers, the tax man or your players, then you are going to hit the rocks. In Barcelona’s case, the latest cash flow statement we have is from the 2008/09 accounts and this did not indicate any difficulties. There was a net cash inflow of €6 million, entirely consistent with the €7m reported profit, with net financing of only €16 million (the €29 million bank loan less €13 million repayments).

It does not take a genius to realise that there must have been a degree of financial mismanagement, if not downright incompetence, over the last 12 months, if you move so far from that healthy position that you need to take out a loan in order to pay your players. OK, this was exacerbated by the fact that Barcelona pay their players’ salaries twice a year, and this July’s payment was inflated by the high bonus payments, but even so.

The club’s cash flow predicament may have been brought about by doubts over when the Mediapro payments would be received (40% of the annual fee is due at the beginning of the season), but frankly it could have been for any number of reasons.

"Laporta warmly welcomes Rosell"

Some have speculated that Laporta only left Rosell enough funds to either make the payroll or buy new players, but not both, thus forcing the new president to not make any marquee signings in his first summer. Others have attributed the shortfall to the purchase of David Villa, when Barcelona for once had to pay the entire transfer fee upfront, due to Valencia’s own financial travails. On the other hand, some have claimed that the liquidity crisis was caused by Rosell’s decision to cancel the scheduled price rise in season tickets, as the previous board’s (unpublicised) request for a bank loan had assumed this additional revenue as part of their business plan. This meant that Rosell had to re-submit a modified loan request.

It has surely become obvious by now that there is more than a hint of politics in this whole mess with FC Barcelona caught in the middle of a deeply personal battle between the incoming and outgoing presidents. Although Laporta and Rosell were colleagues on the board between 2003 and 2005, they have famously fallen out and now only communicate through lawyers. Rosell was elected on a platform of sorting out the financials, so he is hardly going to say that everything is “hunky dory” once he’s put his feet under the desk. Having said that, it is equally clear that Laporta would like to go out with a bang: financial stability as well as sporting success.

"Yes! We've been paid!"

To my mind, the generous provisions made by Rosell smack of what the Americans call “big bath” accounting, which is a very common occurrence in the business world. What happens is the newly appointed CEO attempts to get all the bad news out of the way in his early days, which has two advantages. First, he can blame any problems on his predecessor; second, it gives him a lot of flexibility to demonstrate future profit improvements, as and when the provisions are released. We have seen many examples of this in the banking sector, but we don’t have to go that far to see a precedent: this is exactly what happened in 2003 the last time that there was a change in Barcelona’s president. This may be overly cynical, but it would not surprise me at all if Rosell painted a very different picture in 12 months time (after the first glorious year of his presidency).

Although Laporta has not responded publicly to the accusations made by the new board, perhaps mindful of his ambitions in regional politics, one of his former deputies, Xavier Sala i Martin, has said plenty, including an ironic analogy for the accounting adjustments where he thought that the new board should take the credit for the 2009/10 La Liga triumph, as the trophy had not yet been delivered. This is possibly a bit harsh on Rosell, who did after all gain a resounding majority of members’ votes in the presidential election, but the former treasurer went further, claiming that this might be an elaborate plan for the new board to make excessive profits in their first year, which would apparently allow them to get back the enormous bank guarantees deposited as part of the presidential campaign. I have no idea whether this is true, but it certainly demonstrates the level of antipathy between the two sides.

In fact, there have been so many contradictory statements coming out of Barcelona, that it’s almost impossible to distinguish the wheat from the chaff. How can a club need a €150 million loan to pay its wages, but the next minute also have a transfer budget of €50 million (sorry, €89 million after player sales)? That’s some transfer pot for a club with cash flow problems. Until we can examine the comprehensive financial statements, it’s difficult to get to the bottom of this, but something doesn’t add up.

"I'm heading that way"

What is clear is that Barcelona need to somehow improve their financials. The most immediate action should be to cut costs and they have plenty of scope to do this with a couple of obvious targets. They have already started the process of reducing the enormous wage bill by offloading Thierry Henry and Rafael Marquez to the New York Red Bulls and selling Chygrynskiy to Shakhtar and Yaya Toure to Manchester City. The latter two sales also provided the double whammy of bringing in €39 million of sale proceeds. There may be more to come here with Alex Hleb and Martin Caceres likely to go on loan, though it now seems unlikely that the high-earning Ibra will leave this summer.

It’s also surely not beyond the club to negotiate a bonus scheme that pays out less than the additional revenue generated from any success. Portsmouth also fell into the trap of losing money after their FA Cup win, but you would hope that Barcelona’s executives were slightly more competent than the miserable shower at "pay up" Pompey.

On the revenue side, they could re-introduce the idea to increase season ticket prices, though this would admittedly be tricky in the current economic climate, especially as the stadium is already not filled to capacity.

But there is a far more obvious opportunity in commercial revenue, where the club has already agreed that there is “scope for future growth.” In particular, they could sign a lucrative sponsorship deal. Barcelona have famously never had a shirt sponsor, instead paying UNICEF for the privilege of having their name on the kit, but Rosell has already raised this idea during the election campaign. As a comparison, Real Madrid receive €20 million a year for shirt sponsorship, while Liverpool have secured a €24 million deal, despite their decline. I would think that Barcelona could charge a premium for the privilege of being the first corporate name on the blaugrana shirt, so this could be worth €25-30 million.

"We've got Cesc Fabregas"

Of course, there are many that would like to see Barcelona fail after their unseemly pursuit of Arsenal captain, Cesc Fabregas, which has dominated this summer’s transfer talk. This culminated in an extraordinary statement last week, where they admitted that none of their bids “exceeded €40 million”, which is either massive disrespect to a player of Cesc’s talent or demonstrated a new-found sense of financial prudence. Take your pick.

In a way, the desire for Barcelona’s future prospects to be hamstrung by financial woes is perfectly understandable, as they have undoubtedly sullied their saintly image with their constant tapping-up and inability to shut up about Cesc’s Barcelona DNA, but it looks like reports of their demise might be a little premature. After all, if things get really desperate, they could always raise €100 million by selling Messi.

57 comments:

Only one caveat: the new board said their last formal bid for Fàbregas was €40M, but they had a set of staggered higher bids ready for a haggling process, should Arsenal have agreed to negotiate.

And only one point I'd add. Last year the outgoing board readily agreed to renew the contracts and/or up the wages of most of the regular starters, including - obviously, in view of their stratospherically high profiles - Messi and Alves, although even the likes of Pedro and Busquets also got their slice of Laporta's goodbye pie, I seem to recall. And Ibrahimovic is one of the best-paid strikers in the world, to the extent that his annual cost is said to be the main reason why potential buyers have not exactly been hammering on the Camp Nou's doors this summer.

The upshot is that although offloading Henry, Marquez and Chygrynskiy will go some way towards reducing staff costs, I doubt that the savings made will offset the total liability of Laporta's "parting gifts" or the need to satisfy Ibra's yearning for Ferraris.

"How can a club need a €150 million loan to pay its wages, but the next minute also have a transfer budget of €50 million (sorry, €89 million after player sales)? That’s some transfer pot for a club with cash flow problems."

I found this to be particularly poignant in regards to the Fabregas situation. I can only assume they hoped to pay for his transfer in installments, just as they did with Hleb and Henry. And as far as I know, they are still making payments on those two players. I don't understand why Arsenal, or any other club, would agree to this unless the total transfer fee paid over time was significantly higher than the fee they could command immediately (present value of money, etc., etc.).

I don't believe this practice is exclusive to Barcelona, but I wonder how widespread it is, and for how long it has been in practice. Did Real Madrid pay for Kaka and/or Ronaldo up front or is that a structured payment? What about their previous record breaking transfers of Zidane or Figo? If this is a more recent practice, the stated transfer fees of those players should be inflated to account for PV.

Anyway, great to read insightful, unbiased and informative articles on the often murky world of football finances. Keep up the good work!

What I don't understand re amortisation is that it seems that you'd be losing money twice! Once when you lay out 40mil on a player and than you lose the same 40mil again w/ amortization....!! How does that work Mr Swiss?Btw: love ur blogs.

Put simply, once a plyer is signed, the player is listed in the accounts as an asset, with a value assigned. The value of a player decreases as his contract runs out, and this has to be reflected in the accounts.

A good example would be if I bought a new car for £10,000. The £10K would show up in the accounts as an initial expenditure, but it would also show up in my accounts as an asset worth £10K. At this stage I've not yet made any losses, because regardless of whether I have the £10K cash or the car, either way they're both worth £10K.

Over time the value of the car decreases, so in each successive year I'm making a loss. Had I kept the £10K in cash, I would still have that money... but I chose to buy the car, and it's now only worth £3K, so in essence I've made a loss of £7K.

A lot of people don't understand amortisation, which is simply how accountants reduce the value of assets over time. In this case, we mean footballers.

At the end of a player’s contract, accountants consider that a player has no value, as he is allowed to leave the club on a free transfer.

Let's take an example. Barcelona buy a player for £40m, so if we assume that his contract is for four years, then the annual amortisation would be £10m.

The initial purchase price of £40m is not booked immediately, but for each of the next four years the profit and loss account would include £10m in the costs.

Obviously, the cash flow statement will be different, reflecting the full £40m in the first year (assuming that it is paid upfront). As gg8878 and Ryan indicate above, that £40m purchase will be shown on the balance sheet as an asset, which will reduce over time by the annual amortisation.

It's horribly technical, I know, but the key point is that the cost is only expensed once (and not twice).

Excellent article, Rambler. No chance of getting this published in the spanish sports press? But I see this more as WSJ material! Are you a financial journalist, how long did it take you to compile data and write this article? It is a shame if it only stays in your blog. Again, congratulations!

Thanks. I'm not a journalist, but I have worked in the world of finance for over 20 years in a number of roles, though they usually involved simplifying financial issues for board directors and executive management. I'm just applying those skills to the far more interesting world of football!

@Jack Straw You can see the 08/09 BS of Barca and and on receivable side you find installments from other clubs, this means that Barca should sell players no up front. And I think when I checked Arsenal annual report they does the same way, buy players by a structured payment.

I've been looking forward to this article since the July news about Barcelona's "increased debts". Thanks for clearing up what others don't bother looking into.

On a different note: Could you consider to add a list of "latest comments" to your blog? That make it easier to follow any discussion going on in the comments of old articles, and such also prolong their "lifetime" (more likely to get new comments added), I believe.

Hello, Kxevin here, from the Barcelona Football Blog. We have linked to your piece and snipped a few paragraphs as part of a post. Excellent analysis, and not just because it suggests that we aren't exactly headed for the poorhouse. Even if it did, the Web needs more responsible journalism and analysis, rather than "%#$& Barca, they're skint, hands off Fabregas!"

I imagine some commenters will have questions, and we'd love it if you'd pop over from time to time, in case you feel like answering a few.

Great article, swiss ramble,i go by the name of Ibracadabra at the totalbarca site...this is the first time i've visited your blog..my question is that why don't we have image rights of players like messi etc, while madrid have the image rights of guys like CR9?they seem to earn a lot from that...

To be honest, I don't know whether Barcelona have image rights. It's certainly not broken out in their accounts, as it is in Real Madrid's, but that does not necessarily mean that the club does not earn anything here.

My understanding (based on the Spanish and Catalan sporting press) is that Barca do use image rights, but not to the same extent as Real Madrid (which is part of the reason why they aren't broken out in the accounts).

I have attributed that to a certain conservatism on the part of the Barca hierarchy, given the somewhat controversial tax status of image rights (as well as to the fact that the galacticos policy is all about image), but have no factual basis for that assumption.

Fantastic article, really impressed with the way you made a boring subject such as a club's finances, and made it interesting and readable. Someone linked it over at my blog which I included called sofaball.com, I hope you come check it out. You will find the discussions about soccer/football are fairly intelligent, and for the most part well mannered compared to other places on the web.

And speaking of which Ursu actos, not going to lie, I am a little insulted you didn't make the switch over, after Bobby quit the blogging game. We got most of the same old characters, and would welcome your long rants:-)

Hell if you want to turn some of those rants into blog posting I wouldn't be against that either.

Hope to see you guys there, I will be stopping by your blog much more after this fine article.

1) Regarding bank loans: The fact that thousands of FC Barcelona owners (Socis) are customers in the banks offering the loans shouldn't be underestimated. Banks work for their own interest. Now if you can make their interest concur with yours, fair enough ;)

Those same fans are also citizens who vote. The attachment between those votes and the club is strong enough for some decision makers (even in politics) to make sure not to upset them.

Is it a bad/evil thing? I dont think so. For once, a football club has the "it" to put pressure on the banks rather than being under its knife as it is the case for some other clubs. I say fair enough.

2) Regarding Cesc tapping...etc... Dont believe more than 10 % of what is published. Even that 10 % is most probably subject of lying by omission techniques.

Dearall, what else can I add to all previous quotes about your article, that it hasn't already been said. Fully support to this amazing and high quality piece of material. For your records I have linked to my BARÇA IN SUPPORTER group I am holding @linkedIN ( to bring some light to members on our club's finance ). Evereybody is highly welcomed to join intended for professionals who love or sympathize with Batça:http://www.linkedin.com/groups?mostPopular=&gid=1107787

Great article as usual. I don't quite understand the "UNICEF" shirt deal. Did Barca let UNICEF advertise on their shirt for free? Wouldn't it be better to get a conventional shirt deal and donate the money to UNICEF?

I second the notion of a recent comments update or feature, since I do like to comment on older pieces, since their relevance doesn't diminish as quickly as typical blog posts about the world of football.

Another thorough piece explaining a major question this summer. Would you consider that undervaluing Cesc at only 40 million euros resulted from financial and liquidity pressure? Although you point out that Barca is not threatened financially it as been mismanaged over the last year to the extent that its liabilities have expanded and it has experienced some cash flow problems. Alternatively, is Barca undervaluing Cesc because they believe the player "belongs" to them because of his earlier attachment to and development by the club?

Thanks also for dispelling the notion that a number of fellow Arsenal fans have been expressing--that Barca simply cannot afford Cesc. It is clear that a major transfer isn't the most prudent move but could be absorbed. In reality, the more relevant concern seems to be the satisfaction level Cesc has at Arsenal. Given his most recent comments, I think, his desire for a transfer to Barcelona may have something to do with the frustrations of watching from the sidelines injured as another season went without a trophy while the team made a late, dispiriting collapse. Hopefully, he not only has a professional attitude and performs well for Arsenal while recognizing that Barca does not value him highly enough. I hope he realizes that the best scenario is to go to Barcelona in a couple of years as a winner and champion at Arsenal and in his own right rather than as someone joining Barca's success without any accomplishments of his own.

I agree with virtually everything you say, though I think there may be an element of politics in Cesc's valuation. After all, it's difficult to get elected on a platform extolling financial prudence and then bid, say, €70-80 million for one player.

I will look into this recent comments gadget. The one I found on Blogger didn't seem to work, so I may have to delve into the HTML code :-(

Swiss Rambler,I see the political dimension you allude to as relevant, but the first bid for Fabregas came under Laporta, I thought. Perhaps you are right, though, that Rosell has to be careful with the kind of purchase he makes given his political platform and campaign, so getting Cesc at an undermarket price would have been the ideal objective to pursue. When Arsenal refused to negotiate further and Cesc was prevailed upon to declare his intentions to remain for this coming season at Arsenal, Rosell's opportunity to bid higher very incrementally until the end of the transfer period ended. Everything about the tawdry way the transfer process was conducted suggests Barca's first consideration was to depress the transfer price.

Either Barca miscalculated how determined Wenger and Arsenal would be to keep him or how much Cesc might be willing to publicly call for a move and act unprofessionally. Otherwise, I don't believe they were as serious, monetarily speaking, about Cesc's transfer and proved that they undervalue him, as they did before when he was a teenager.

Indeed, Malfeasance, that would clearly define Laporta´s mismanagement of Barcelona´s funds. For instance, allow me to point out a couple of dramatic examples...are you aware that in order to donate 100.000 € to an african country, 250.000 € were lavishly wasted between first class air tickets, luxury hotels, gourmet restaurants and a never ending list of friends and family invited to the superb holiday?? Equally, and shamefully, Laporta used the club´s resources to satisfy his sexual drive, by employing his lover in the club, a brasilian lady, unqualified for the job but certainly willing to please and satisfy her "boss". They are just a token of what has been going on in FC Barcelona in recent years, needless to say with the knowing silence of many people. One just hopes that many other such past eventualities will not go unpunished.

I don't quite understand how amortization can work for football players. In the end of the day, there are so many ways a player can get out of contract. The most explicit way is to refuse to play for the team or to deliberately perform appalingly, like scoring an own goal. Since clubs actually lack control over its players, transfer fees would be more appropriate to count as expense.

Recognizing players as assets allow clubs like Spurs to claim a profit from transfer markets in a scenario where a club pay wages to a player, rarely plays him, and sold him at a lower fee. Miraculously, this can be count profit when in true sense of economics, it is de facto a loss. Wonderful stuff from accounting.

The schedule of owed transfer fees be repaid by Barcalona, the ability to bully banks to provide cheap funds for operations (and transfers) will be the decisive factor for Barcelona's finance in a short term basis. In a longer term basis(more than 1 year), there shouldn't be much worries. As mentioned by the ever brilliant The Swiss Rambler, shirt sponsors can bring in great deal of money to the club and Barcelona can always sell some of the most prized player to Man City at obscene prices.

Just read about the drop in the turnover of Celtic and Rangers' financial difficulties are also known.I guess that's why they're so keen to join the EPL.They can't grow in Scotland anymore. Can't increase their grounds' capacities, can't get bigger sponsorship and TV money, etc...

I would love to learn more about their prospects, it must be very interesting.

"After all, if things get really desperate, they could always raise €100 million by selling Messi."

Really? To whom?

To sell there has to be a buyer. Sure, ManCity could be interested but I am honestly not sure even they would want to pay that much for him - and would Messi even want to go there? You can't sell a player against his will. And besides, what if he suffers a serious injury and his worth drops to nothing?

I fully agree that Barcelona are not exactly about to go under tomorrow, but I still think you are painting a picture that may well be too bright and there are several dark clouds on the horizon. The bottom line is still that if you borrow money to pay running costs (which they, by their own admisson, have done) you are in trouble and the extended and improved contracts given to Messi et al won't just go away because the new guy in charge wants them to. And I still don't see how paying wages twice a year can be a factor in have cash-flow problems. They are not making enough money to pay the wages, end of story. Why would the frequency of the payments have anything to do with it?

And while the banks may not want to demand money back from Barcelona unless until the shit really hits the fan, even banks can end up in situations where it's kill or be killed. And not everybody in Catalunia is a Barca fan, they are after all not even the only La Liga team in the town of Barcelona. In a situation where it's "protect my savings or allow Barca to buy yet another superstar" I'll bet you that quite a large number of fans would opt for saving their own money - especially those who are fans of other clubs.

I hope I don't come across as too critical, I think you have done an absolutelyt brilliant job writing this peace, I just don't agree with all your conclusions.

I am quite disappointed, to be honest, that you chose to try to score an easy point (which you failed to do, by the way, what I am saying is that they are not at all in such a good position as you seem to think) instead of actually adressing the issues I brought up. I really though better of you.

I put in a considerable amount of time and effort analysing Barcelona's finances in almost painful detail, only for you to make cheap comments like "Really? To whom?" However, when I reply in kind, you're the one that's disappointed.

OK, let's address the issues you brought up:

1. If Barcelona were really in serious difficulties, they could easily raise funds by selling assets, i.e. their players. Somewhat tongue-in-cheek, I mentioned Messi for €100m. It might not be Messi, it might not be €100m, but the point is surely valid.

2. Borrowing money to pay wages is obviously not a good thing - I covered this in the article.

3. "They are not making enough money to pay their wages, end of story." It's more complicated than that, as I thought I'd explained in my article.

4. Clearly, banks will not provide unlimited credit to any institution, even FC Barcelona, but my belief is that it would take an extreme set of circumstances before they pulled the plug.

Thank you for the kinds words at the end of your initial comment, but frankly they did not seem to be in tune with your earlier points. Apologies for my response, which may well have been overly sensitive, but if you take another look at the tone of your comment, you might just understand why I reacted as I did.

Either that, or it's because of my hangover after watching YB against Spurs.

I never meant to come across as rude, so apologies for that of course. A sincere thanks for your latest reply, now I'm off to work on my written English so I don't sound so rude the next time around :-)

I'm Pere Jansa, the director of communication of the FC Barcelona. I have liked much the quality and the analysis of the article. I would like to contact directly with the author of this article and to organize an interview with him. Please, put in contact with me in following direction e-mail:

May thanks excellent article. Perhaps the days of the Spanish banking system’s charitable attitude football club lending is over. The recent stress test on the European banking system showed problems Spanish banks have, 5 of the 7 banks that failed are Spanish. The bank most closely associated with Barcelona FC is La Caixa, a Barcelona based, mutually owned bank closely aligned to the Catalan region. La Caixa didn’t fail, but only scored 7.7, 5 was a fail, 6 was a must do better but most large banks, such as Santander scored 10. Britain’s own basket case, Lloyds scored 9.2, that is in 2 years given unfavourable economic conditions Lloyds will own 9.2p for each pound deposited with it.100M EUR is miniscule given the size La Caixa’s loan book, but is symptomatic of the banking culture in Spain. Many banks have very strong attachments to the region in which they are based and may have seen themselves as regional development banks. Increasing European interest banks’ capital reserves may see this change, unless the appointed regulator is a Catalan.

the business model of UNICEF with Barca, maybe to encourage "niche" market..just say like this..if barca shirt just common commercial company..like "nike" instead UNICEF, i just buy 1 shirt only for me..but since their shirt is "UNICEF", i might be buy it 10 shirts, so every christmas i will give 1 shirt to my love one,since i know my money partly will eventually donate to UNICEF.

If you have time to get detailed again:) on the new season as they will announce their financial details for last season in the early november at the annual meeting.

I am interested on how important was a good CL season for them and how that reflected on the finances. Because It was great to hear from Rummenigge that they are expecting a record turnover in the region of 350m €. And they did sign some new sponsors and improved their existing deals with T-Mobile and Audi.

Like I said if you have time for that...if not I will be still glad to read some other articles on other clubs:)

Excellent piece! (Your ego must swell with every comment post...)Just discovered your blog and it was the first time I read something truly sensible about Barcas situation. As an outsider it's impossible to know whose numbers to trust, so it is quite a service you've provided here. (As a sidenote it's a disgrace that the Catalan football press can't offer the Barca socis this kind of informed analysis instead of their tabloid-junk.)It did confirm the feeling I already had though: that Laporta's board were very irresponsible in the last couple of years of their mandate, while Rosell is working the numbers to fuel his vendetta against Laporta.

It does make me feel even better than I already did about the off-loading of Ibra. While a terribly stupid deal to begin with, at least the club won't be paying him €60 million over the next four years, and also recuperating €24 million in tranfer fee.

Excellent article as always, yes it's a serious blog but the best thing is you explain the complex financial stuff in language that is easy to digest for people, which I appreciate.

Of course Barca won't go under and the fact they are allowed to take out a loan to cover wages is shoddy practice. Never in doubt that RM and Barca get away with a lot more than the other clubs in La Liga.

A new TV deal for La Liga is something that needs to happen and soon, of course the same teams will be at the top as they are now because they will be in the position to generate more money than their rivals and will still receive a greater share as you said.

Zlatan was a poor move, they have had made some shocking transfers, but the players they developed internally are worth so much.

Then the politics of it all with Rosell and Laporta. The membership decision from Rosell is foolish wouldn't they want the money from the socios coming in.

What's your say to these comments from Gay de Liebana? Are Barca technically bankrupt?

""[That] Barcelona, the Liga champions and Champions League semi-finalists in 2009-10 and winners in 2010-11, are technically in a state of bankruptcy is alarming for the entire football sector," Gay de Liébana said."

Yes, I've seen that report. It's correct to the extent that liabilities are higher than assets, which is the definition of technical bankruptcy, but it's not really meaningful, as Barcelona can clearly meet their obligations.

Other points:

- Total liabilities include items like trade creditors, provisions and accruals as well as bank debt.- Assets are under-stated on balance sheet, as does not reflect full market value of players.- This report is a year out of date (based on 2009/10 figures). Since then, Barcelona have reduced their debt, though it's still on the high side.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation